Explorers' League Dispatch, Vol. IV; No. 5
in response to
by
Significant gold resource - Excellent infrastructure
Camino Rojo Mexico : In-situ - 4.0 million ounces gold; 68.32 million ounces of silver.
Message: A Simplified Valuation
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If you read 7/8 of the way down you will see CPQ got a good word.
IV; No. 5 |
April 28, 2008 |
The Explorers' League is a membership organization dedicated to helping its members learn and profit by following the careers of the world's most successful resource explorers and developers. |
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IN THIS MONTH’S DISPATCH…
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| But first, a word from our sponsor ¬ |
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| 8 | FARALLON RESOURCES: A STORY OF SUCCESSFUL NAVIGATION |
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In May, 2005, Farallon Resources (T.FAN) made a polymetallic breakthrough discovery at its G-9 deposit in Guerrero State, Mexico. Immediate follow-up work showed this deposit had large amounts of zinc, along with copper, silver, lead and gold. It was clear to the prospectors they had what every explorer looks for: a mine. But the road to production is sometimes riddled with unseen potholes and careless drivers. Prior to this discovery, Farallon had everything thrown at it that could wear down even the most seasoned miner – a persistent litigant, metallurgy quirks, and production preparation issues. But now the dust is settling and FAN is not only still standing, the company has a producing mine at G-9 right around the corner. I spoke with the chairman of Farallon and XL Honoree, Ronald W. Thiessen, about the challenges Farallon faced, how they were able to successfully navigate through them, where the company stands now, and what investors can expect going forward. Ron also weighs in on the bull market in gold and where he ultimately sees it going. You’ll see why we’re honored to have Ron in the Explorers’ League... Explorers’ League Editor Jeff Clark: First, Ron, tell us about the initial discoveries in Mexico. Ronald W. Thiessen: Campo Morado has been an exciting prospect right from the beginning. Dr. Dave Jennings, one of the HDI [Hunter Dickinson, Inc.] principals who has since passed away, was always interested in volcanogenic massive sulphide (VMS) deposits. He became aware of the property in 1994, and went to the site in 1995. He was impressed by the geology, the nature of the mineralization, and the grades from samples in the workings. In fact, when Dave and well-known HDI geologist Mark Rebagliati assessed the deposit, they gave it a “10” – a must-have ranking. Farallon spent the last part of 1994 and most of 1995 working out a deal with the property owners, and in the fall of 1995 we were able to step in and close an initial option to acquire the property. The property was not an unknown – the initial deposit had already been found. In fact, it had been a small operating mine around the time of the Mexican revolution in the early 20th century. However, the real potential of the property was recognizing it as a VMS system and utilizing systematic exploration to make a rather extraordinary series of new deposit discoveries over the next few years. From 1995 to 2000, we conducted geological, geophysical and geochemical surveys, and followed up with 64,000 meters of drilling. As a result of all this work, new resources were outlined in the Reforma deposit, which also led to discoveries of three other deposits – Naranjo, El Rey and El Largo – where we’ve since outlined significant resources. In addition, some six to ten other mineral occurrences were also identified. So, it was safe to say that the mineralized potential of the Campo Morado field had been confirmed. Low metal prices caused a four-year hiatus in activity; however, since work resumed in 2004, drilling upgraded the majority of the mineral resources in the Reforma, Naranjo and El Rey deposits from an inferred to indicated category. Additionally, El Largo was significantly expanded and most of the resources were upgraded to the indicated classification. XL: And then you had your big discovery... RT: Everything changed in May 2005, with the drilling of hole 420 – that would be exploration hole number 420, so you see it pays to be persistent. Hole 420 was a greenfield or pure exploration hole, designed to test gravity anomaly #9, hence G-9. This anomaly was south of the four main deposits and was also south of the major regional structural feature – the San Raphael fault. Seeing the core, our geologist immediately knew we were on to something significant, in a different mineralizing system to that of the deposits at Reforma, Naranjo, El Rey and El Largo: the mineralization was coarser grained, and the assay results were outstanding. Hole 420 returned 15 meters grading 14.2% zinc and 1.8% copper, including a 10-meter interval grading 17.9% zinc and 2% copper – a very exciting moment. Since then we’ve drilled 244 holes in G-9 and outlined about 6 million tonnes of resources. G-9 is the largest and the highest-grade deposit found so far, with grades as high as 25-30% zinc being encountered in some drill intercepts. It’s truly a world class deposit – and we continue to add to its potential. XL: That sounds exciting. Let’s go through the main issues Farallon has faced since the first discoveries. First, litigation... RT: In my mind, litigation was never an issue. We went to great lengths to ensure that the option agreement was rock solid, and we dealt with prior investors and participants on a fair and equitable basis. The most significant legal actions were launched by David L. Hermiston and his associates in 1996. The proponents of the litigation filed three different kinds of litigation/stories/allegations in three different jurisdictions. In all of the court actions in the various jurisdictions, no evidence was actually presented and the courts have ruled in favor of Farallon in each instance. So, although these legal issues have been ongoing for some time, it’s important for investors to know that the company has prevailed in every instance in all civil and criminal cases initiated by David L. Hermiston and his associates. Also, Mr. Hermiston has lost every appeal since he commenced his actions against the company. Currently, he has filed an amparo to have a recent decision of the court denied or held back from release; Farallon continues to monitor and provide responses as necessary, but it is not deterring us from our intention to maximize the value of the company and its project for our shareholders. XL: That had to be distracting, though. RT: These actions have been a needless distraction to the main story and developments at Campo Morado, so we’ve had to be persistent in the face of many challenges. But we’ve had the advantage of having a rock-solid case, and are not letting this deter or deflect us in our task of working toward building a mine at G-9. XL: The site also had some metallurgy issues. RT: Until the discovery of G-9, metallurgy was the most significant impediment to the development of Campo Morado. Developing effective and efficient methods of metallurgical treatment is a very important aspect of mining polymetallic deposits. The grades of the Reforma, Naranjo, El Rey and El Largo deposits, coupled with metal prices in the 1990s, meant that the precious metals content constituted about 50% of the value of those deposits. Additionally, the fine-grained nature of the deposits, along with the gold and silver being locked up with pyrite meant that conventional flotation did not yield economic recoveries. G-9 turned this issue on its head. G-9 is coarser grained, and its mineralogy, with higher grades (particularly zinc), is amenable to conventional flotation treatment with excellent recoveries. Very few VMS deposits can boast recoveries of 94% zinc with a 54% zinc concentrate grade. This has become a competitive advantage for us. XL: And then there were the usual issues with moving into production, which isn’t easy to begin with. Tell us where that stands now. RT: Farallon has refocused from being an exploration company to becoming a production company. This is never an easy task. The transition to production is often the hardest step to make. But Campo Morado is an excellent project with tremendous potential. In 2003-2004, a competent management and site team were assembled with the sole objective to advance the company and the project, which we’ve done. Most importantly, we discovered the G-9 deposit. G-9 is the vehicle to meet our production goal in the short term, and the parallel-track strategy is how we plan to do it to maximize shareholder value. The other deposits and ongoing exploration potential of the property provide excellent longer-term development opportunities. XL: So, the $64,000 question is, what’s going to get the market to look at Farallon with renewed interest? RT: Production. And our parallel-track program has put us in a position to significantly shorten the time to become a producer. The normal route is to explore, engineer and finance; a sequential process that usually takes at least 5 years and many times more. When many of the other junior mining companies with single assets have tried this approach, the market said, “Well, when will you be in production?” And when they said, “Another five years – and oh by the way, we need to do another financing for the feasibility study,” that didn’t go over well with the market. So, we decided to proceed with a parallel-track program, which has shortened the time to production by two years. Sure, it cost us more upfront, but our target is to produce this July instead of 2010, and investors are very pleased with that. And that would mean we’ll be delivering product this fall. XL: Exactly how does the parallel-track approach work? And why aren’t more companies using this strategy? RT: Well, it works best for smaller projects – a billion-dollar project has more inherent risks and the upfront capital magnifies each risk. Attempting a parallel-track approach on a larger-scale mine is going to be a challenge, but on one that is essentially a $135 million capex is a different story. Still, you have to have the expertise, the knowledge and the dedication to make it work. Basically, a parallel-track development program consists of the three elements being pursued simultaneously rather than sequentially... First, your exploration and resource delineation drilling, which in our case included the step-out and infill drilling we did to expand and upgrade the G-9 deposit. Second, you have engineering, procurement, construction management (EPCM) and associated activities. For example, developing the underground access necessary for mining, mine planning for production, metallurgical testing and plant design for early equipment purchasing, and permitting to enable site preparation for plant and tailings facilities. Third and last, you have the financing strategy. The central objective of this simultaneous approach is to complete the necessary project evaluations, exploration, construction and financing in time for a production decision to be made ahead of the target date for start-up production, which in our case is July 1, 2008. We adopted the parallel-track strategy after consciously weighing the risks associated with targeted, upfront capital expenditures, versus the risk that a failure to incur such costs would result in future delays and larger capital expenditures. It was our conclusion that the potential benefits of a parallel-track strategy outweighed the risks, and so we proceeded on that basis. XL: And it looks like you’ll be successful... you’re still on track to begin production by July 1st? RT: We are still on track. We also expect to have lots of news over the next few months because of ongoing exploration and site activities. XL: Most of G-9 production is base metal-related, but base metals have been stagnant. Are you bullish on base metals? RT: Recent forecasts for zinc prices indicate some concerns about supply in the near term, but moving back to shortfalls within two years. Nonetheless, prices are still much higher today than they were four or five years ago. Our parallel-track strategy is designed to take advantage of the zinc prices in the short and medium term, and Campo Morado will look after the long term. Being polymetallic, Campo Morado can also rely on other metals – copper, lead, silver and gold -- whose prices are still very strong, and all of which are present in the mineralization at G-9 and the other Campo Morado deposits. And keep in mind, the polymetallic nature of G-9 provides added value. We expect the project will be even more robust with the projected price increases for gold and copper. XL: FAN is currently trading at C$0.74... what would you say to an investor considering the stock? And what does the future hold for FAN? RT: Farallon is a near-term opportunity for investors to be involved in a company that is focused on making the transition to production over the next few months. A preliminary assessment of the project indicated the potential for strong cash flow, and Farallon is currently trading at a significant discount to the multiples of equivalent operating companies. Additionally, the exploration potential at Campo Morado has been substantially increased in scope following the discovery of the Abajo Zone in the G-9 deposit last year. A whole new mineralized stratigraphic horizon has been opened up, giving us essentially the whole concession to re-explore. As for the future, we see Farallon as an emerging mid-tier producer, “imminently” – that’s our goal. XL: Will your energies shift focus at all after production begins? RT: Farallon is capably led by President and CEO Dick Whittington, who is developing a team dedicated to Campo Morado and other growth opportunities for the company. As chairman, I lead the board and work with Dick and management on strategic activities, and remain committed to providing input on that level. The potential of this project is now set to be realized, so it seems to me that this is just the beginning for Farallon. XL: Last, Ron, care to tell us where you see gold ending up in the current cycle? RT: That depends on what you call “cycle”: the long cycle that we are in or, say, some intermediary 6- to 12-month cycle. This long cycle started really in 2003 and I believe will continue for a minimum of 20 years. So where gold will end up in 2023 is very difficult to predict because there are so many variables. Through this 20-year cycle, there are going to be ups and downs, as different economic conditions present themselves, play out and pass; the current U.S. situation for instance. I believe over the next 24 to 48 months, which is the period the U.S. is going to struggle, gold will approach $2,000, maybe even exceed it. |
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| 8 | NAME THE EXPLORER |
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As you see, finding and building mines are not easy tasks. Here are a couple stories from other XL-ers that will make you sit up. Who is it? “We had some people come into one of our camps and demand dynamite. But we didn't have any, so they went away. We were working in one district where a geologist of mine came to me and said, "You know, I have bad vibes about working here." We left the next day, and a few months later another company in the area had a geologist murdered.” Name the Explorer. “Our group found an offshore field in Oman, in the Gulf of Suez. And in the Strait of Hormuz. That was right during the Iran-Iraq war. We had gunboats around our oil rigs. It was exciting. They shot down that Iranian airliner and it landed a kilometer away from our rig. Lots of fireworks.” Name the Explorer. ****************SPONSOR*************... Gold is taking a breather… now’s the best time to make your moveGold prices are down of late…but they’re not going to be staying there long… which means that now could be the perfect time for you to get into this market. But if you’re concerned about the risk of speculative gold investments, Casey Research has the solution. BIG GOLD is the Casey newsletter that’s perfect for the conservative investor, who’s looking to make a profit in this unprecedented gold market – without betting the farm to do it. Monthly updates on the most reliable places to make money in gold – Gold funds, ETFs, and stocks…plus in-depth company profiles and analysis you can only get from Casey Research. Find out everything BIG GOLD can do for you with a three month, risk-free trial subscription…simply click here. |
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| 8 | IN THE NEWS |
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Click on the link to read the full press release. Ross Beaty Teck Cominco (TCK) has entered into an agreement to buy Global Copper (T.GLQ), specifically the Relincho copper/molybdenum deposit in northern Chile, while GLQ’s other assets will be spun off into Lumina Copper Corp. Both companies have unanimously approved the transaction, which is expected to close on or before September 30, 2008. This is the Ross Beaty’s second copper deal in 4 months. Lukas Lundin and Duane Poliquin At the Caballo Blanco project in Mexico, where Canadian Gold Hunter (T.CGH) and Almaden Minerals (T.AMM; AAU) are partners (70/30, respectively), an intersection of 94.5 meters grading 2.09 g/t gold was hit. Both companies have high hopes for this property, and it’s certainly off to a great start. Ron Netolitzky Brett Resources (V.BBR) reported high-grade gold mineralization at their Hammond Reef property in Ontario, including 37.5 meters at 3.35 grams/tonne gold, 2.53 g/t over 30 meters, and 22.5 meters of 3.61 g/t. Skeena Resources (V.SKE) intercepted 112 meters of 0.949 % copper, 0.427 g/t gold, 3.0 g/t silver and 188 ppm molybdenum from the first 10 diamond drill holes at its advanced MALPICA copper-gold project in Sinaloa State, Mexico. Catherine McLeod-Seltzer Bear Creek Mining (V.BCM) announced a new zone of silver mineralization at their Santa Ana property in Peru. Recent drilling shows continuity and higher silver grades, including 148 meters of 166 grams/tonne Ag. Robert A. Quartermain Following up on last month’s XL dispatch, Canplats Resources (V.CPQ) reported that recent drilling results at their Camino Rojo project in the state of Zacatecas, Mexico shows that gold-silver-lead-zinc mineralization extends both laterally and at depth. Robert Dickinson/Ronald W. Thiessen Following up on Ron’s interview above, Société Générale just announced a commitment of $10 million to Farallon Resources’ (T.FAN) G-project in Mexico. The funds available in the Bridge Facility will now be $30 million. Detour Gold (T.DGC) has agreed to exercise its option to acquire the Detour Lake property from Goldcorp (T.G; GG), making them the sole owners of the property, where they’ve been focused on exploration and feasibility. Rockwell Diamonds (T.RDI) acquired the Middle Orange River Alluvial Diamond operations and projects, which are adjacent to Rockwell’s Wouterspan mining operation in the Northern Cape Province in Southern Africa. John Prochnau Columbus Gold (V.CGT) was featured on CNBC on April 27. The 5-minute program, 21st Century Business, shows how the company is poised to capitalize on the gold bull market. Here’s the link... |
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